Examination of Witnesses (Questions 285-321)
Q285 Chair: Good
morning and thank you for agreeing to respond to our questions.
Can I apologise for being slightly late? We have already had
one meeting, which ran over slightly. It would be helpful if
you could just start by introducing yourselves for transcription
purposes, perhaps starting with Stephen.
Stephen Phillips:
My name is Stephen Phillips, the Chief Executive at the China-
Britain Business Council.
Dr Brown: Kerry
Brown, Head of Asia Programme at Chatham House.
Professor Nolan:
Peter Nolan, Judge Business School, University of Cambridge.
Q286 Chair: Thanks
very much. We will start with a couple of general questions.
First of all, China's growth rate has really been sustaining
the world economy. How has it managed to achieve this growth
rate and is it sustainable? You do not all have to answer the
same question, but do so if you feel that you can add something
to anything that any other speaker has said. So who is going
to lead off on it?
Dr Brown: Well
I think the Chinese data say that the growth rate has been 9.5%
to 10% over the last 30 years, so since 1978. There was a decent
growth rate during the Maoist period, this is often forgotten,
from the 1960s onwards when the fiveyear plans were first
introduced—I think the first was 1953—but since 1978,
it has been a very different kind of model, with the use of special
economic zones, of which there were 14, and heavy industrialisation.
Now the whole country is like a special economic zone.
Most people say that the imminent fiveyear
plan, the draft of which is going to be introduced in March and
which will be the 12th fiveyear plan, is probably going
to promise less growth and go for quality of growth. The Chinese
Government now knows that since entry to WTO in 2001, this really
unleashed forces of productivity, which, when I was a diplomat
at the time in Beijing, we didn't expect to be so huge. It has
sort of been a victim of its own success. Inflation is now nearly
5% and therefore there probably is the need to look more at issues
of quality and balance of growth, rather than just being a GDP
factory. Finally, the one thing you can say is that, for the
last 30 years, the one thing everyone agrees with is that China
has been a factory of GDP growth. There is no dispute about that.
Q287 Chair: Would
it be fair to say that arising from this growth there has been
a rather unequal distribution of benefits from it, which has to
be addressed in future?
Stephen Phillips:
Certainly there has been uneven distribution of the benefits
of that growth. The vast majority of the economic growth has
taken place in the eastern coastal provinces and has led to a
population there that is much wealthier than those that live in
the central and western provinces. It is clearly a Chinese Government
priority to even out that balance of economic prosperity. There
is a lot of Chinese Government policy that attracts investment
to the central provinces, to the provinces in the north-east in
Dongbei and to the south-west and to the north-west. What we
are seeing is this migration of economic activity into the lesser
developed provinces to address this very issue of unequal incomes
and economic disparity.
Q288 Chair: Thank
you. Was it Churchill who said socialism is the equal sharing
of miseries and capitalism the unequal sharing of benefits? I
have paraphrased that slightly. Here we have a communist country
that seems to have managed to capture the essence of capitalism.
Looking ahead to the People's Congress in March, and you have
alluded to this tangentially, what will be the implications in
terms of policy decisions made there for UK trade with China?
Dr Brown: Well
I think the problem in the last 10 years, and Peter knows this
better than I do, is really that consumption has fallen as a proportion
of GDP. I think 50% of GDP was consumption, maybe even as little
as 17 years ago; now it is something like 36%. I think part of
the fiveyear plan is going to address how to create more
consumption to do something about these massive trade deficits,
which are becoming a political problem; to start implementing
the Copenhagen Agreement, so a 40% to 45% reduction of carbon
emissions by 2020; and finally really to keep China on track to
increase its per capita GDP to middle-income status by 2020, which
would be about $6,000 to $7,000 per capita. At the moment, China's
per capita GDP is about $4,000 so that would be to quadruple it
from $2,000 over 20 years by 2020 to become a middle-income country.
That is the key objective but Peter knows more about this.
Professor Nolan:
Right. I will try to link together the three issues about why
China has grown, whether it is sustainable and what is going to
happen in March. China is on a very unusual path of late development,
and it is a curious fact of history that each late-developing
country that gets on the escalator and is successful grows faster
than the previous generation—from Britain through to America,
Germany, France, Japan, Korea and now China. So the advantage
of the latecomer is enormous. The ability to benefit from the
information technology revolution has been fantastically important.
Chair: Could you just
speak up a little?
Professor Nolan: Each
latecomer country has grown faster than previous latecomers—from
Britain, through to America, through to Japan, through to Korea
and Taiwan and now China. Now in this case, the advantage of
the latecomer for China is many-fold, but if you want to single
out one, I would say the information technology revolution has
had a fantastically positive impact on everything in China.
If you want a few points to encapsulate why China
has grown so fast, the first point I would make is people have
mostly predicted wrongly, and so we must be very careful when
we think about where China is going today. It does not mean things
will be bad but we should be very careful about where the herd
is moving in terms of their perspectives. In the late 1980s,
if you go back to the conventional wisdom about China, it was
up the creek to nowhere—in the words of one famous commentator—it
was a halfway house, socialist market, neither one thing nor the
other and it had no prospects. That is the late 1980s. After
Tiananmen, with very few exceptions, everybody thought China had
no serious growth prospects at all and that the Communist Party
could not survive. So the ability to get China wrong is fairly
substantial.
So the question is where are we now? How has it
got to where it is? Political stability is absolutely fundamental
and Kerry can talk for equally as long as I can about the importance
of the Party. We think about the Party in different ways but it
is a very, very capable organisation and it has got more and more
capable. It is intensely competitive, meritocratic in fundamental
senses, and if you want a single institutional reason that is
probably the most important reason.
China also has a very, very powerful capitalist tradition.
People talk in Chinese economic history about what is called
the "Capitalist sprouts"—it is a rather ugly term—and
places that many of you have visited or will visit, places like
the delta area around Shanghai, the Pearl River Delta in southern
China, have for many hundreds of years been vibrant bases of capitalism.
Of course, it is well known that in 1800 China's industrial output
was far greater than that of Europe and this was the basis of
it: capitalism, markets and trade. Therefore, that has in a sense
been allowed to flourish in the mixed economy since the 1970s.
A deeply important question is what the Nobel prize-winning
columnist Arthur Lewis calls "economic development with unlimited
supplies of labour", and China has, up until this point,
had huge unlimited supplies of labour pulling workers into the
urban areas, supplying us with cheap goods. A big question is
when will this surplus army of labour dry up, and there is a lot
of debate amongst Chinese economists about this. It is certainly
getting to that point; how quickly and how sharply it bites is
fundamentally important as it will affect the whole character
of China's political economy. The point at which China reaches
the end of the Lewis development path is a huge question for debate
amongst Chinese scholars and politicians.
If you look at the institutional structure of China's
business, it is very unusual. It is three intersecting segments.
You have small and medium-sized enterprises, which many of you
have visited or will visit, which are extremely vibrant, quasiprivate,
very dynamic. You have an extremely important segment of foreign
and direct investment, bringing in high technology. The third
segment is China's state-owned enterprise, and they coexist
in an extraordinarily powerful interdependent, and up until this
point, unique relationship. I will stop there, perhaps; I wanted
to lead into the Congress in March but I do not want to speak
too much.
Q289 Chair: Thanks
very much. That is very helpful. You talked about quasi-SMEs—
Professor Nolan:
Quasi-private. Let me give you an example; one of the many companies
that I visited is a very famous company called Haier. The head
of Haier is man called Zhang Ruimin. The Royal Bank has touted
Haier as the exemplar of private enterprise in China. Talking
to Zhang Ruimin—a bit closer than you are to me—I
said, "Who owns your company?" He said, "I haven't
got a clue. I really don't know. It is so complicated. I have
so many entities. I have got plants across China. This one is
owned by local government; this one is owned by a bit of this
and a bit of that; so my ownership structure is extremely complicated.
One of my major tasks as the leader of this powerful enterprise
is to deal with the complicated ownership structure that arises
from operating in this country. That is one of my skills."
So there is very little successful business above a certain size
that is a pure private enterprise in a Western sense.
Q290 Chair: So
there must be a body of legislation that defines corporate organisations.
Professor Nolan:
Absolutely.
Q291 Chair: Are
you saying that the legislation is so wide-ranging and complex
that people don't understand it, or that the actual corporates
that grow up don't necessarily conform to any of those legal models?
Dr Brown: Yasheng
Huang, an economist in America who is originally from China, described
it as like a political pecking order. In fact, if you look at
the political system, there is the Government, the state, and
then there is the Party and the Constitution does not spell out
where the division lies. The way you express it is that activity
all happens under the leadership of the Communist Party, but there
are rules that look very much like the legal system in the West.
The problem is that that is under a sort of political order where
that will trump any kind of legal decision.
On the role of entrepreneurs that Peter referred
to and stateowned enterprises and entrepreneurial companies,
in fact it was a long battle from the 1980s to the 1990s to really
recognise entrepreneurs. They were in a kind of legal grey area
and under the previous President and Party Secretary, Jiang Zemin,
they were given a legal status so they could join the Communist
Party. In fact if you look at the entrepreneurs—private
business people, nonstate business people—a third
of them are Party members now, which is the highest figure of
any social group. For the usual supporters of the Communist Party,
farmers, urban workers or professional classes, it is about 5%
to 6%. Membership of the Communist Party as a whole is about
6% of China's population, so entrepreneurs are big supporters
of the Party and the idea that they will be agents of political
change is probably a little naïve.
Finally, on this issue of state and nonstate,
Marx said anything above eight members in an organisation was
already capitalist because it would involve some kind of capital
exploitation. In China, once you get beyond an enterprise of
eight people, then the State will be involved by having a resident
party secretary. So it is very difficult to do business without
state or Party involvement, without political involvement.
Q292 Mr Binley:
We are used to seeing the SME sector as the home of thrusting
creativity. In this country, about 70% of Britain's creativity
comes from that particular sector. Normally, that degree of creativity
presupposes a degree of independence, not least political independence.
Some of the most awkward buggers in the country are small- and
mediumsized business people. So I do need to try to understand
what you mean by this quasi element, how that impacts upon creativity
and how that relates to a degree of independence, which you suggest,
because of Party involvement and so forth, does not exist, or
perhaps does not exist in the same way that it does in this country.
Professor Nolan:
It certainly does not exist in the same way as in this country.
The answer is this is a creative combination. For example, in
many people's view Haier is the most successful business in China.
I would say that is a rather exaggerated view, but it is certainly
very, very successful and very creative in terms of new technology
and dealing with customers. But it is a fact that a substantial
part of its ownership is very difficult for the leader to identify,
it is very complicated—spread across the whole country—but
there is sufficient incentive left for him and for those who work
for him to enable him to be creative. It is a highly creative
body, even though a large body of its shareholders are various
kinds of government entities across the country. There is sufficient
left on the table.
After all, the manager of a global bank or a global
business does not have a very large stake in ownership, just a
tiny fraction. So the state is a very important part of the ownership,
but there are sufficient incentives left on the table for the
entrepreneurial leader and those around him or her—usually,
it is him—to be very creative.
Q293 Chair: Could
I just ask, which was the company you referred to?
Professor Nolan:
It is a famous company called Haier. It makes white goods and
is very successful. It is in Qingdao but it has branches across
the whole country; it is a very interesting example, much praised
by the World Bank and much written about. There is nothing secret,
in that sense, about it.
Q294 Chair: You
have spoken about the fairly unusual interlocking of the private
sector and politicians—the Party structure. Logically, if
there is a change in leadership in 2012, how do you think that
could affect business relations with the UK?
Stephen Phillips:
Perhaps I could build upon some of the answers and also address
the point, if that is okay. Everything that my colleagues have
said is absolutely true. Looking at it from a more pragmatic,
business point of view in dealing with these organisations—whether
they are large stateowned enterprises or, indeed, genuine
SMEs in the context that we think of them—you are dealing
with businesses that behave in a very commercial way, and in a
way that is very familiar to UK businesses. Behind what you see
on the surface is this political dynamic going on, but I would
say that it is not that alien to a business dealing with a Chinese
business on a day-to-day basis.
In terms of the likely change of leadership, all
indications are at the moment that there will be a continuation
of the continued opening up and reform of China, which will continue
to offer increasing opportunities for collaboration. There will
be a change of emphasis; China won't be looking to attract the
type of investment that it has been looking for in the past and
there will be much more focus on cleantech, hightech
industries and so forth. So there is going to be a changing shape
in the opportunity for business but that opportunity will continue
to exist.
Dr Brown: I think
America has gone to the WTO in the last couple of days about credit
card payments because at the moment only one organisation, UnionPay,
is allowed to take credit card payments in China.
Chair: Just on this issue,
I was going to invite Nadhim Zahawi to come in. To a certain
extent, you have anticipated our next question.
Q295 Nadhim Zahawi:
Thank you very much. That is precisely my question: how well
do you think China is keeping up with its WTO commitments?
Dr Brown: Well,
I think it has fulfilled them all and managed to protect what
it wants to protect completely legally. These will be big battles
in the WTO because it is not entirely clear that they violated
any of their conditions, and I think they have scrupulously fulfilled
them. I have to say, I was in the Embassy in Beijing as a diplomat
when the WTO agreement was signed and if remember rightly at the
time, 10 years ago in November 2001, we were kind of sceptical
that China would be able to meet its obligations. We did not
think it would be able to do much on retail banking. We thought
it would expose its stateowned enterprises to fierce international
competition. We thought five years for the implementation of
most of the commitments was pretty ambitious. Well, like it has
with the Millennium Goals, it has reached these much earlier than
we expected and it has fulfilled them.
The problem really now is that it has become the
victim of its own success, in a way, because it has surpassed
what it promised. It is getting into very technical areas at
a time when it is also having to look at—as the FiveYear
Plan is probably going to cover—all sorts of more gritty
areas of social and political change, which I do not think the
Party has got a very clear route to deal with. The problem is
it is in a transitional phase, as Peter referred to, where the
economy has in a sense been successful but political change, the
changes between the state and the Party and political structures—how
to deal with having contention in society; how to deal with having
independent unions; how to deal with having a proper legal status
for civil society; how to deal with political opposition in a
more creative way than just banging people up—is becoming
much more of a priority. It is more difficult to build consensus
there.
The Standing Committee of the Politburo, the nine
members, exists for one reason: to create consensus. Therefore,
as we move towards 2012, the issue is that each of the people
on that must have a clear political role to look after certain
constituencies and also a clear political role to look after certain
economic constituencies, including stateowned oil companies,
certain monopolies like the tobacco monopoly, and certain areas
of economic activity, including provincial economic activity—Guangdong,
for instance, is about 20% of China's GDP. You follow the money.
With the Politburo, you look at each person who is likely to
come on to it, you look at their economic function, their political
function and the constituency they look after. There is the consensus
and there is the political and economic roadmap for China for
the next five years. It is all about individuals.
Q296 Nadhim Zahawi:
How important is China's control of the rare earth metals to
the world economy and ultimately to UK growth?
Stephen Phillips:
Perhaps if I can just answer from the UK perspective. Obviously
this is a hot topic, certainly in terms of the media. I have
checked with the CBBC network of 20 offices and also the British
Chamber across China and as far as I know, we have not had one
single inquiry about this issue from UK companies. That perhaps
puts it in the context of the UK. Clearly for other countries,
it is a much more serious issue, and certainly if you look at
countries like Taiwan, Korea, Japan, it is a much hotter issue.
But from the UK point of view at the moment, it does not seem
to be a major issue.
Q297 Nadhim Zahawi:
Stephen, a question for you: in your submission you say that "the
level of understanding and awareness of modern China in the UK
is not as good as it needs to be," but isn't it your job
to improve the situation?
Stephen Phillips:
Of course that is part of our job, and for that reason we run
something like 200 events across the UK every year to raise awareness
amongst the big business community of modern China and what it
means for companies by way of opportunity. However, more fundamentally
in the UK, our education system doesn't support young people getting
a good knowledge of what is going on in China and, indeed, Asia
more generally, and that needs to be addressed at an earlier stage.
It would also be helpful if there was more coverage
in the UK media about what is going on in Asia and indeed in China.
A lot of the coverage tends to be on the negative side as opposed
to actually setting out what is going on in the country. It may
be rather silly to think that the media would pick up that they
have a responsibility to address this. Generally speaking, however,
from the companies that we see coming to this, their level of
knowledge is incredibly basic to begin with and it is a risk to
the UK if UK business people do not understand what is going on
in the second largest economy in the world. Somehow, through
many different means—and I think it is through multiple
means—we have got to improve the knowledge of what is going
on in China and Asia more generally in our country.
Q298 Nadhim Zahawi:
Do you concur with that view?
Dr Brown: We have
a problem because in a relatively short space of time the dynamics
have changed quite a lot in the UK and China. The priority up
until 1997 was the hand-back of Hong Kong. This was a huge, contentious
issue and we dealt with it, but since 1997 China's economy has
grown exponentially and the UK has become a relatively small partner,
in some ways, for what China is. That means that going through
the EU for a lot of issues is important, and there we do do a
lot of negotiation multilaterally and that is just going to have
to continue.
Secondly, it means a lot of the tools for our diplomatic
dialogue with China have got to become much more sophisticated.
We need to have pretty knowledgeable people to interact with
China. As a final example, the life of a politician in China
is one where you are highly trained. You end up as a Minister
after many, many years of going through provinces, going through
specific technical departments. These are very formidable negotiators—very,
very formidable—as we learnt at Copenhagen, and as you well
know, for a British politician, the path is different: it is very
diverse. I am not saying one is better than the other but it
just means that, in a sense, a politician from China and a politician
from a Western democracy are quite different; they can be quite
different.
Q299 Nadhim Zahawi:
So are you saying that we are paying the price for Hong Kong?
Dr Brown: Well
no, not at all. I don't think we are. We are still the brand
carrier for colonisation and imperialism, and we get beaten over
the head by that and there is a big historic grievance. But in
the end, the policy is very pragmatic where we are of use to China
and its enormous internal needs. That is the bottom line.
Professor Nolan:
We have a big problem about populations' understanding and perceptions
and the role of the mass media. This hysterical, widely read
article in the American magazine Fortune is a very good
example: "China buys the World". People reading that,
just seeing the headline, would think China is buying the world.
They would not have any understanding at all of the role of multinational
companies in China or, in fact, how limited China's outflow of
direct investment is. The media serve us very, very badly, I
regret to say.
The fact is, if we go back to the question about
where China stands in terms of fulfilling its WTO commitments,
the US in the 19th century, Britain in the 18th century, Japan
right through to the present day, Korea and Taiwan: none of them
remotely would meet WTO commitments today. China has met its
WTO commitments. Kerry was in the middle of the discussion in
the Foreign Office, I was part of the wider network of discussions
around that issue, and today it is an extraordinary reality that
China is the most deeply engaged of all latecomer countries in
world trade. Exports plus imports are nearly 70% of GDP—that
is a fantastic depth of integration.
Even less well understood is the role of multinational
companies in China. Foreign direct investment in China has increased
from less than $30 billion in the year 2000, just before
China entered the WTO, to $500 billion today. Last year
it increased by $106 billion. Foreign-invested enterprises
in China, foreign firms in China, account for 55% of China's exports,
so who are we? Who are China? Who are they that are exporting
to us when we think about trade imbalances? Some 55% of China's
exports come from foreign firms in China and most of these are
exports that are based around processed goods from imported components.
Two thirds of China's hightechnology outputs—things
like electronic goods, medical equipment—come from foreign-invested
enterprises in China. If you look at China's exports of hightechnology
products, 90%-plus come from foreign firms in China: East Asian,
European and American.
So when we think about who they are and try to understand
them, the media have a very, very high duty and we have a duty
in our different roles—in the business sector; in government;
and in my own job, in universities—continually to put things
in balance and explain just exactly where China is on this path
of development. One of the important issues is how open it has
been and I entirely concur with Kerry's view.
Q300 Mr Binley:
I think your comments there, Professor, lead nicely on to my concern.
We talk glibly about the middle class and we have a perception
of the middle class that is both cultural and economic and may
even be a wider perception in many respects. Yet we note that
there are 300 million people defined as middle class in China.
How does our perception and the reality of that group of people
merge? Is it the same thing or are we talking about different
things?
Professor Nolan: Well
it is quite curious to come here today because I am reading Barnaby
Rudge at the moment, and in 1780 we had a very interesting
event that took place in these buildings in the centre of London.
We have our own complicated political evolution and the position
of the middle class in that is quite an interesting one. Just
to remind people, in June 1780, we had our own Tiananmen in this
country and up to 900 people were mown down by troops as the prelude
to our industrialisation, so we should keep that in mind when
we think about our values and the role of the middle class. The
middle class were very unhappy indeed, and didn't give people
the vote for over 100 years.
So where does China stand? The first thing is, when
we define the Chinese middle class, we should be very, very careful.
The Chinese Premier came to my university, the University of
Cambridge, and he gave a speech almost two years ago, which ended
catastrophically and said all sorts of things about many things.
The title of his speech was Looking at China from the Angle
of Development, and in terms of the global standard of the
middle class, China does not have 300 million people. It
may have 100 million people; it may grow to 1.3 billion
people, but that is entirely speculative. Today it is still a
relatively small middle class and prospects are good and one hopes
it does grow but China is still a poor country.
When we talk about China catching up, the Chinese
middle class and how China views the world, we should remember
some very simple facts. China probably produces more chocolate
than Belgium—I am not sure about that—and it may produce
more cuckoo clocks that Switzerland; that is almost certainly
true, but those are not very interesting comparisons. The fact
is China has 1.3 billion people and when we talk about
China catching up, the role of the Chinese middle class in the
world, we should remember that we, the whole of the high-income
countries, have 1 billion people or less. China has 1.3 billion
people.
If you look at China's gross national income in purchasing
power parity—which I still think overestimates China's national
product because so many products are of low standard—it
is less than one fifth of that of the highincome countries,
and that is probably an exaggeration. It is growing faster but
we can all speculate about the future. China's household consumption,
because China's household consumption share is relatively low
and stands at less than the total volume of household consumption
in purchasing power parity dollars, which is rather questionable
and maybe overstates it, is less than one tenth of us in the highincome
countries.
So the middle classes are growing and that is good
news for everybody and it is good news for this country, but we
should bear in mind the Premier's speech, Looking at China
from the Angle of Development. It still has a long, long
way to go. There are 800 million people in China who are
by any Western standards very poor people.
Q301 Mr Binley:
Thank you for that because it is easy to take into your head socalled
facts that do not really relate, and that is why I wanted to ask
that question. Let me then go on because it seems to me that
Britain's export potential is not totally but well weighted towards
middle-class consumption, and this leads me on to the real thrust
of my question. Given that the middle class is not the glib size
that we have just talked about—I have just put that to you
and it has been destroyed—how difficult does that make it
for British industry and British export to take advantage of that
particular sector, bearing in mind the reliance upon middle-class
consumption?
Professor Nolan:
I am happy to talk about it but I think my colleagues should have
a further comment.
Stephen Phillips:
A middle class of 300 million people is not an insubstantial
customer base.
Q302 Mr Binley:
But we know it is not 300 million people. That is the very
point.
Stephen Phillips:
It may or not be 300 million people; it may be 100 million
people. The reality from a business point of view is there is
a middle class and a consumer class that is buying luxury goods,
quality goods, quality services from Western enterprises. There
is a very real market there and it is growing substantially.
For instance, if we just look at the last 12 months of car sales
in China, certainly some of the companies I have spoken to have
seen growth of between 50% and 70%. Clearly that is not sustainable
but it is real and that includes truly luxury car brands. As
you go round Chinese second and third-tier cities, you will see
branded shops selling European highquality goods that you
do not see in cities across Europe. That is real; people are
buying these goods in China.
So whether or not it is 100 million, 300 million
or 500 million people, there is a class of consumer who is
buying stuff from the UK, and that is only going to increase in
the future. That does not get away from the point, though, that
the UK is still, at least on the surface, underperforming in China:
second largest economy, but only the ninth largest export market.
What balances that out a little bit is that the UK, compared
with Germany for instance, has invested as much money in China
as Germany has. Therefore, on a per capita basis, to a certain
extent the UK has put its money where its mouth is in China, in
a way that perhaps other countries from Europe have not. It is
quite a complicated picture.
Chair: Yes, we are going
to come on to that in a moment.
Q303 Simon Kirby: Are
you aware of any discussion within Government about replacing
the existing Framework for Engagement strategy, and if
a new strategy were to be created, what do you think should be
in it?
Dr Brown: Do you
meant the one from 2009?
Simon Kirby: Yes, that's
right.
Dr Brown: That
set out three or four benchmarks, such as helping China with its
internal reform, increasing economic co-operation, and educational
tourism, and I doubt whether they would be changed. The current
Government has said that it will stick to the policy of the previous
Labour Government because it was successful engagement, and what
is the alternative? You cannot really have disengagement, so
I think it is unlikely it would change.
However, the battleground still remains to really
attract more Chinese investment to the UK. As an example, when
Li Keqiang, who is likely to be the replacement of Wen Jiabao
as Premier, came to the UK in January, he bought Eurobonds in
Spain and so maybe $6 billion worth of investment, in Germany
I think it was $9 billion, and in the UK I think we signed
deals of $2.4 billion. Of course there are still a lot of
other things going on and in fact the UK is still the largest
destination for Chinese investment. That is the real battleground.
The second thing is that we have two strategies.
I suppose we can say that we go through the EU as trade partners,
and the EU and China are the biggest trade partners in the world—bigger
than the US and China—so we can go that route, but at the
end of the day we still have to fight bilaterally for job creation
in our countries and it is very, very tough. The EU can fight
generic battles, like whether we get proper market access for
key strategic areas, and for the UK it is obviously financial
services that we feel we are locked out of at the moment. However,
it is unlikely we are going to be able to hold hands about manufacturing,
more because Germany still has a big advantage there. Stephen
mentioned car manufacturing, and Germany's exports of cars to
China are still pretty significant.
It is a pretty competitive market within the EU to
export to China, and we are at a disadvantage because the things
that we may want to export, like financial services, are not quite
there at the moment. But I do not think it is the wrong strategy
for us to hope that there will be very viable financial services
markets in China with an emerging professional, urban class that
is pretty significant and has quite a lot of purchasing power.
Professor Nolan:
Obviously, in some important senses we are a part of Europe, but
in other important senses we are not. We are not in the Eurozone
and we are perceived by China as being a very different animal,
obviously, from the United States and also from Continental Europe,
and that is to our advantage. The nature of our political economy
and of our business system has evolved in a very different way
from that of France, and particularly from that of Germany. We
have gone down a different path and the possibility for engaging
with this country in wider issues of mutual benefit and of common
interest for the whole world puts the United Kingdom in an interesting
position. We are by the far the most open of all the highincome
countries. If we have time, perhaps we can talk a bit more later
about the degree of our openness. Just today, GE has bought Wood,
which is one of the most important manufacturers in its niche
in the oilfield services sector. Every day there is a story of
this kind, which is not a good or a bad thing, but it differentiates
us sharply from Germany and to some degree from France.
In terms of this Framework for Engagement
that you are talking about, business needs to be seen within a
wider context of relationship to China, one in which the Foreign
Office and our Government fully appreciate that China still is
a developing country. When we talk about what is going to happen
in the Congress in March, issues of how China becomes more efficient
in its use of energy, how Chinese people can live in more pleasant
urban environments and how the living standards of poor Chinese
people can be raised are central questions.
I applaud the Framework for Engagement because
it goes beyond the mentality of pigs and troughs and is a wonderful
opportunity for us to clean up in China. We must have profit
and benefit from our businesses, but we can have a most fruitful
relationship for China in a wider context of political relationship,
and we are in a very advantageous position because of our history,
both past and recent. The Framework for Engagement
is good and China perceives us as an important part of the story
of trying to establish a sustainable development path for itself
and for the world. For example, we still face a crisis in the
global financial system, which we can argue was caused to a considerable
degree by policies originating in this country, but we are at
the forefront of efforts to try to correct that to improve the
regulation of the global financial system.
In other words, we are in a position to co-operate
with China on issues of financial regulation, issues of dealing
with climate change, issues of dealing with our natural environment.
We face the prospect, as Edward Wilson puts it, of an "age
of loneliness" because we are destroying our species at such
a wild rate. All these senses should situate business in a wider
context of a longer-term relationship with China, which goes beyond
the last 30 years of what I would call wild capitalism—or
whatever you want to call it—into a more intelligently regulated
capitalism. As the document for engagement outlines in a very
interesting way, China views us as a very important partner in
that endeavour.
Q304 Mr Binley:
I just want to ask a very quick question because you did say we
had some advantage and that was based on history. Was the work
in Hong Kong and the changeover pretty important in that respect?
Professor Nolan: It
was important; it was part of that tapestry of trust and relationship.
For example, Chris Patten is a welcome speaker at the Party School,
and that was a very important part of trust. It was not the only
thing.
Q305 Mr Binley:
But it is that sort of thing, is it, that you think helps to create—
Professor Nolan:
It does help and, to be blunt, the tradition of our universities,
the tradition of the English language and globalisation all help
as well. I do not want to speak too much, but I hope that later
on in the discussion we will have time to talk about some common
challenges in terms of their business structure when we come to
talk about foreign direct investment. I think in some curious
ways, there are a lot of symmetries in the challenges that China
faces in its large business sector with those that we face, and
that are rather different from those of Germany, America and France.
Q306 Simon Kirby:
Professor Nolan, if, as you say, the UK is in an advantageous
position and if, as you say, Dr Brown, both a bilateral and multilateral
twin-pronged approach is working, why is it that Germany does
so much better than us? They export five times, possibly six
times, as much as we do. How can you square that?
Dr Brown: As I
said before, the UK's economic strengths as I understand it are
really in things that China is not quite ready for. There are
things where we have been successful, which Stephen will know
about better than me. In certain carbon-capture technology areas
or hightech areas and education provision we have been very
successful, but our focus has really been on financial services
and banking, and that is still being developed in China.
Germany has put a lot of effort in. Its political
relations with China were good. Chancellor Schröeder went
there every year, while I think Tony Blair only went there twice
in 10 years. So there was a difference in political emphasis,
but I have to say that the previous Prime Minister, Gordon Brown,
and now David Cameron have been going there annually, and they
have put a lot of political effort into it. Goodness knows how
many ministerial visits there are to China each year, so the politics
since 1997 is straightforward. It is not all about one issue.
The perception of the UK in China is quite ambiguous.
On the one hand, we are obviously successful in getting Chinese
students to come here; about 100,000 are here, which is almost
as much or maybe more than America. We have been tremendously
successful, although it will be very important to look at the
impact of tuition fees on that as it might be a huge negative
area. However, despite many years of effort by the British Council,
the British Embassy and many others, the UK is regarded as being
a conservative, oldfashioned, traditional place where you
can maybe come for a holiday; there has been an increase in tourism
to about 175,000. Finally, for Chinese visitors to the UK, of
course it is a big problem that they cannot get a unified EU visa—they
have to get separate visas—and there are restrictions on
that, so these perceptions are quite difficult to shift.
Stephen Phillips:
Perhaps I could just add a few points to that. In terms of why
Germany has outperformed the UK, the reality is Germany has been
making what China has needed as it has gone through a rapid period
of industrialisation. It manufactures the kit and the machines
that China has needed to build the factories that have allowed
China to develop rapidly.
One of the things that the UK has is very advanced
engineering but, from a Chinese point of view, what that means
is that the UK makes something that tends to go into somebody
else's kit, so they do not see the UK element. What China wants
overall is turnkey solutions, and the UK isn't great at offering
that. Other countries tend to be a little bit better about giving
an end-customer in China the whole kit that they're looking for.
Picking up on one point that you mentioned, Kerry,
another thing that I hear quite frequently when I go around China,
from both Government officials and from businesses, is that UK
businesses do not come across as being as hungry for business
as their counterparts from the US, other parts of Continental
Europe and other parts of Asia. There is an issue, perhaps, in
the way in which UK businesses are a little more low-key; if they
were a bit pushier, they might get a bit more traction.
Professor Nolan:
The global business system has gone through an extraordinary revolution
in the last 30 years and in my evaluation, which I think is just
unarguable, at the head of the global business system in almost
every sector is a small group of oligopolists, basically, who
are giant global systems integrators.
The path of development, for very complicated reasons
of history in recent decades, has left Germany in the enviable
position that it has a mighty group of very, very powerful industrial
manufacturing systems integrators. I was in Siemens last Friday,
and one of my PhD students is studying the evolution of the value
chain at Siemens as an example. Companies such as Daimler, Siemens,
VW, BMW, ThyssenKrupp, BASF—the list goes on and on and
it is a very long list indeed—have engineering, manufacturing,
and systems integration prowess. They connect very closely with
the Mittelstand, the small and medium-sized enterprises in Germany,
which connects with the German education system, its technical
school system and many other features of the German political
economy. We have sold almost all of our systems integrators to
companies from other countries, and that is neither good nor bad
but that is a reality.
German firms do not just export to China; they produce
in China in huge volumes. Those firms that are capable of doing
it—and many are—have taken with them their SMEs within
their supply chain. We have a problem in the disconnect between
our own firms and global systems integrators. It is very hard
for something like CBBC or another branch of Government policy
to say that we will do something to resolve that. It relates
to the fundamental structure of our political economy, and Germany
has evolved out of the last 20 or 30 years with a huge advantage
in that respect in terms of high-technology systems integrators,
their predominantly German supply chain and the incentives for
people to attend university or technical school and become engineers
and work in those companies.
My own view, which I have thought about a great deal
in terms of where our country is going, is that we cannot reinvent
the wheel; we are where we are. As Charles Powell and Mrs Thatcher
put it, we have become a mercantile society, and we are jolly
good at it and our companies have very high market capitalisations.
We have to think of a way of engaging with an economy where the
commanding heights are services, retail, banking, media and marketing.
We have to accept that and find a way of finding our place in
the world, not by reinventing German or French style manufacturing
but by building on that uniqueness and that difference, and engaging
with China around that foundation that we have, which is very
different from that of Germany.
Q307 Chair: Just
a couple of follow-up questions. First of all, and I think this
has been alluded to, we may be exporting far more manufacturing
to China than the statistics would convey because in fact we manufacture
a part of finished goods that are denominated as coming from other
countries. Is this a reasonable observation, and could anybody
give a rough estimate of what sort of additional wealth is created
by that? My second question is: do we know how many German firms
are operating in China as compared with British firms?
Professor Nolan:
There are 5,000 German companies operating and producing things
in China.
Q308 Chair: And
British?
Professor Nolan:
I don't know. If you asked me to guess, I would say 500.
Chair: Right.
Professor Nolan:
It is just a wild guess.
Stephen Phillips:
I think the MOFCOM statistics say that there are 6,500 UK companies
operating in China, but that may include things like BVIs.
Professor Nolan: It
needs to be carefully investigated.
Chair: Could you project
your voice this way? I am having difficulty hearing.
Stephen Phillips:
Yes. I think statistics from MOFCOM, the Chinese Ministry of
Commerce, show there are about 6,500 UK-registered companies operating
in China, but that needs to be taken with a pinch of salt and
would need delving into.
Dr Brown: I did
research this about five years ago. If you go to provinces, they
will give you lists of joint ventures. For instance, in Inner
Mongolia I think there are 44 official UK investments including
the TaiwanLondon Cake Factory. They are offshore so there
are probably about two authentic British investments of that 44,
so I think the figure is right—6,500 joint ventures.
About the components, if you think of Airbus, obviously
a part of Airbuses are British—maybe 20% to 30% sometimes—and
if they have Rolls-Royce engines then it might be 50%, but the
engines and the wings are put on our exports to Germany and then
the complete plane is put on German statistics, so that is a huge
amount. That is the real cream of your export figures, and they
go on Germany's, and there are a lot other examples that do not
go on our figures.
Q309 Chair: It
obviously distorts the figures. I do not know how many Rolls-Royce
cars are actually exported to China, maybe none. They are obviously
German-owned but British-built. How does that figure in the statistics?
Dr Brown: Bentley
has been much more successful, and I have not got a clue about
Rolls-Royce, but there are some really odd things. For example,
the world's biggest Louis Vuitton shop is in Taiyuan, which is
in the middle of China, but it is subsidised by the local government
as a flag carrier. The luxury trades area is pretty complicated
and, as I say, I think Bentley sell out within an hour of taking
their stuff over there, but does that really contribute a huge
amount?
Q310 Mr Binley:
I seek clarification really. I have been in business all my
life, it is my prime interest and I have been selling for most
of my life. You made a strange comment about Britain not being
pushy enough, and yet we were told that you only do business with
China if they like you. There is actually a bit of a dichotomy
there, and I want therefore to know a little more about what you
really mean at the coalface about how we can be more successful
at selling.
Stephen Phillips:
That is a very fair point and obviously building a relationship
is absolutely critical to doing successful business in China.
I was merely reporting what I hear very frequently as I go round
China. One of the questions I ask quite often of people I meet
is, "What could the UK do better?" One of the most
common answers I get back is that UK business people could be
hungrier for business, and they are making the comparison with
American or German salespeople.
Q311 Mr Binley:
Okay. Without prolonging the discussion, it seems to me this
is a pretty important point that really matters. Could you come
back to us with a more considered view of how we could improve
that situation?
Stephen Phillips:
Certainly. When I go round I will ask further probing questions
as to exactly what these people mean. Yes, of course.
Q312 Simon Kirby:
Those were fascinating answers about the mismatch between the
sectors that China is interested in and perhaps the sectors that
the UK can provide. That having been said, do you think the Prime
Minister's Trade Mission—where he prioritised sectors of
highend manufacturing, advanced manufacturing, financial
services, which you say are still developing in China, low-carbon
urban development and digital media—prioritised the right
sectors, and where does that leave the other sectors in the UK?
Dr Brown: It is
really important to have senior political leaders from the UK
open doors. That is still important and that is really why the
CBBC has an important function, because it has political leverage.
You have to pick your battles, really, so to have those sectors
there is realistic. We are not going to be able to export certain
manufactured objects, because they make 70% of the world's toys
or something. We are not going to succeed unless we are really,
really careful about what we choose to engage in.
The only point about trying to do business in China
is, obviously, it is a long way away, it has a very different
culture and it takes a lot of time, and I guess a lot of SMEs
do not have that time. It is a pretty big choice for them to
go and do it; they must be sure that they are going to succeed
before they go, or have a good likelihood of success, and the
question I would ask is whether the Government should not do more
now to support small and medium-sized enterprises in this battle.
I am sure that the big boys like BP and Rolls-Royce and all the
rest will be okay—they will be able to fight their battles—but
SMEs need quite a lot of help. It is there that certainly the
British Government and the European Union have a lot that they
can do to help them.
Stephen Phillips:
Mr Chairman, might I add something to that? CBBC was very actively
involved in the Prime Minister's visit and the business delegation.
The choice of those sectors was actually really driven by needing
a focus for an event, so you get the right businesses to meet
the right businesses. If you just try to take a very scattergun
approach in terms of tackling all sectors of the economy, then
it is very difficult to get businesses from one sector to meet
businesses from the same sector in China. That is why there was
a focus on particular sectors. The sectors chosen were ones where
we believe there is genuine potential. What I would say is that,
throughout the year, there is a whole range of activity that goes
on, either from UKTI, the CBBC or a whole range of other organisations,
covering every sector of the UK economy. Certainly from work
at CBBC, I can assure you that it is very, very broadly based.
We touch almost every sector of the economy across the whole
of the UK.
Chair: This is a very
important issue and we are pre-empting the questions I know Rebecca
Harris is going to ask. We will just go on and deal with intellectual
property before I come to Rebecca's questions.
Q313 Paul Blomfield:
We have heard in the course of this inquiry that there are specific
concerns in relation to intellectual property rights, and they
are often cited as a barrier or as a contributing factor to caution
from British business in engaging with China. Do you think those
are real concerns?
Stephen Phillips:
Perhaps I can take that in the first instance. IP concerns are
legitimate, they are real. Perhaps the perception of the issue
in the marketplace is lagging the reality. China has made a great
deal of progress, as it has around WTO commitments for instance,
in terms of improving the environment in China. Certainly the
legal framework is very well developed now; the biggest issue
is the enforcement of IP judgments. It is very notable, though,
that in excess of 90% of IP cases in China are Chinese against
Chinese, and as China moves further up the value curve there is
a vested interest in China having an environment that is supportive
of developing IP. It is quite a rapidly changing situation but
it is a legitimate concern.
There are lots of legal and commercial ways in which
companies can tackle IP risk. You can keep certain elements of
your technology offshore; you can keep certain bits of your technology
in Hong Kong, for instance, if you want something very close to
the mainland market. There are lots of ways to overcome the issue.
What we see at CBBC is that there is almost a presumption by
every business that they have an IP issue, when perhaps businesses
do not even have IP to protect.
Q314 Paul Blomfield:
I think you have probably answered the question I was going to
ask you about the submission comments you made to us about interior
improvements over the last decade. So the material improvements
are that the legal framework is getting better, and the weakness
remains enforcement. It is a very interesting point you make
about the internal dynamic leading to a requirement to tackle
the issue, because that is certainly not the perception we have
heard from some of those who have given evidence to us.
Stephen Phillips:
I think maybe, if I could add to it, that there is an absolute
commitment by the central Government to getting this right. The
further you go away from Beijing, the more diluted it becomes
and the more local vested interest—which goes back to the
early comments about Government being connected to business—comes
into play when actual cases get heard in the judicial system.
Paul Blomfield: Okay.
Thank you.
Professor Nolan:
Again, I am very fond of the now late historian Christopher Hill,
who wrote a book called The World Turned Upside Down.
I think we have continually to balance our own legitimate interests
and hopes against looking at things from China's angle, and how
they see the world. China is a large country in population terms
and it is growing very fast, but one of the most useful pieces
of research that the Government has conducted in this country,
and which is sadly now to be stopped, is the Department for Business,
Innovation and Skills annual report on the top 1,400 companies
in the world by research and development. It is an exceptionally
useful document.
In the last 30 years the process of concentration
of research and development in the hands of a very small number
of immensely powerful and capable global companies has been palpable.
They report that the top 1,400 companies spend $600 billion per
year on R and D. That is all the intellectual property. That
is the core of the world's intellectual property. The top 100
companies, according to the BIS estimate, have 60% of the expenditure
of the top 1,400 companies. These are the companies that we all
know: Siemens, GE, RollsRoyce, Boeing—it just goes
on. There are no Chinese companies among that at all—not
one. If you go further down the list, there are a tiny handful
of Chinese companies.
If you look at international competition in hightechnology
products, Chinese firms are really nowhere. They are selling
lots and lots of things to developing countries—low-end
mobile phones, maybe there's an IP issue there, but it is lowend.
It is not the top end. There is a famous study of the iPod.
It is a tiny proportion of value-added in China. Out of $244,
something like $3 is added in China through assembly. In the
statistics, it appears like a Chinese hightech export, but
it is not. The high technology is all embedded in multinational
companies, in investment in research and development. Global
companies fight: they do not just have to think about IP in China;
they have to think about Western companies trying to capture their
knowledge. It is one thing to get a blueprint, and another thing
to produce a product. I think that China is a long, long way
behind. It is making progress, but it has a long, long way to
go. We ought to look at things from their angle, and then that
will help us to have a more fruitful conversation.
Chair: Can I just move
on to Rebecca Harris on SMEs and inward investment?
Q315 Rebecca Harris:
Yes, as the Chairman said, we are starting to pick up on those.
What sort of specific recommendations would you have for how
we can encourage more SMEs to engage with investing in China and
Chinese companies, and do you think this is a role for Government
to do more, or for trade associations?
Professor Nolan:
Is this us going into China—our firms going into China?
I have a different view from most people. I think that the most
successful SMEs going into China are going into China because
they are successful in the value chain of existing global companies.
Let me give you two examples, although they may not be strictly
SMEs; they have grown into something else.
Take for example Rexam. Most people here are familiar
with Rexam. It is a UKbased/headquartered company, a very
high-technology company indeed, producing beverage cans. They
produced a few beverage cans last year—65 billion beverage
cans. Most people are unaware of that. It is a UKbased
company, but it produces almost nothing in the UK. However, it
is part of the value chain of CocaCola, PepsiCo, AnheuserBusch
InBev, as it now is, and SAB Miller. We cannot help them. It
is beyond an SME. However, their relationship does not depend
on the UK Government or another Government. It depends on their
relationship with a leading global company.
Q316 Rebecca Harris:
You are saying we cannot encourage—
Professor Nolan: I
think it is quite difficult—
Rebecca Harris: —to
come in on the tails of—
Professor Nolan:
I think it is quite difficult. The most important function of
Government is in a wider discourse with China about the broad
pattern and direction of development. There is a limited amount
that the Government can do, given the nature of the global business
system. IMI makes postmix machines for fizzy drinks, but
the Government cannot say, "We will help you go into China."
It is, I think, technically a mediumsized enterprise, but
its advance into the world economy, which is very successful,
producing across the world, including in China, comes not because
the Government has helped it but because it has built, on its
own, a powerful relationship with CocaCola and PepsiCo and
other global soft drinks producers.
I think the Government's most important functions
are what it does in the wider context here, especially education,
in providing a place that global companies want to come and produce
in, have their headquarters activity, their R and D, their procurement
functions, their branding functions, and that is something where
the Government can be really crucial. We have such a disconnect
between the global business system and systems integrators and
SMEs. There is obviously not nothing, but there is less that
the Government can do than one might imagine.
Stephen Phillips:
The supply chain is obviously an important route for SMEs to
get into the market, but it is not the only route. There are
many companies that CBBC have worked with that have gone in direct.
The fast-changing nature of the Chinese economy, the emergence
of private-sector SMEs in China, does mean that there are new
opportunities almost to create markets that do not exist.
One example is a company from Hampshire that we have
worked with, who were actually found on the internet. They have
sludge treatment equipment, and they are now manufacturing that
under licence in Shenyang. That is a microbusiness—fewer
than 10 employees. They have done this in a period of less than
10 months, and are now doing good business. Another company with
which we have worked is now selling software to Chinese hospitals
to track MRSA in hospitals. Again, it is a microcompany.
There are opportunities.
I think the biggest challenge for SMEs is the lack
of resource in the broader sense: both money and number of hours
in the day. SME business owners tend to be pulled in multiple
directions. That is the biggest challenge in the context of China,
because it is a long way away and it costs a great deal of money
to develop the market. You do need to build those relationships
that were mentioned earlier, and that requires a huge amount of
investment, both timewise and capitalwise. There
are good opportunities, however.
Dr Brown: Just
a very specific thing, but Government procurement in China is
very important. The state is a big buyer. One of the battles,
both through the WTO and also through the EU, is to get fair treatment
in Government procurement. This is something that German companies,
when they were with Angela Merkel last year, complained about—including
BASF and I think BMW—to Wen Jiabao, the Chinese Premier.
There is not a lot of transparency, and there is a suspicion
that Government procurement tender processes in China are not
entirely easy. They are very weighted against foreign companies,
but they are huge and they are sometimes hospitals, sometimes
education provision, sometimes big projects for infrastructure.
They are really the commanding heights of the economy, and to
have a fair procurement procedure would be pretty important.
At the moment there is a lot of evidence that that is not the
case.
Stephen Phillips:
Mr Chairman, may I just make one more point? I think that there
is also another issue for SMEs. When you think about where the
UK has got strengths—in hightech, in very innovative
products—one of the challenges is that most of the buyers
of those in China tend to be very large companies: SOEs. The
stateowned enterprises tend to have a desire to deal with
Fortune 500 companies. For an SME that has something that these
companies really need, getting a foot in the door is actually
quite hard. That is an area where the Government and CBBC can
help and does help, because it does require convincing these organisations
that this titchy little company has something of tremendous value.
The natural inclination, however, is, "If they are not Fortune
500 then I do not want to talk to them."
Q317 Rebecca Harris:
You have identified that there are opportunities there, and you
have particularly referenced some firms that you have supported
recently. How do we try and encourage more UK firms, given their
time constraints or whatever, to look at it as a business opportunity
and to get involved? Do we need the trade associations to help
them with the problems they might have, with the amount of time
they could commit, or is it a role for Government?
Stephen Phillips:
It has to be multipronged. Obviously there is a huge SME
base in the UK. Government touches a proportion of that, but
only a relatively small proportion. CBBC itself touches a small
proportion. We work very closely with CBI, the IOD—organisations
like that—and then trade associations as well, to get the
message out to help companies understand what it means for them.
I genuinely think that we have to use as many routes to market
as possible. In my written submission I also mentioned that I
wrote to all MPs after the election, just to let you know that
we exist. I genuinely believe that we need people on the ground,
across the country, making companies aware that there is support
available to help them.
Q318 Rebecca Harris:
The flip side of that is, how do we encourage more investment
from China into the UK economy?
Dr Brown: We decide
what we want. It has been a constant problem to have a clear
policy from the UK about what kind of investments are wanted and
where they go. I think Japan invests something like $100 billion
into the UK, and China at the moment invests about $1 billion.
It is a very small amount. In terms of job creation, as Peter
said, the fact that China, from a low base, has increased its
overseas investment by a huge amount is true. It is probably
now some $250 billion globally, and $50 billion of that was added
in the last year.
If you look at where it goes, a huge amount goes
to Hong Kong, because that is still considered an overseas territory
for investment figures. Some 90% of it is statedirected,
central money, so we are dealing with the state as an investor.
Of course, in the United States that has caused huge political
problems—do you want a Chinese company to buy an energy
company, as was thought to have nearly happened in 2005? In the
UK the biggest investor from China so far is Huawei, which is
a telecoms company. There have been issues of security and issues
of state involvement. It is pretty complicated.
At the end of the day I think countries have to have
pretty clear policies for engaging with this money from China,
because it can be problematic. It can have all sorts of political
issues, and yet, of course, it is a pretty inevitable trajectory
when you have $2.6 trillion of central reserves, most of which
is in foreign debt at the moment. That needs to be deployed.
I think the biggest investment in Europe at the moment is Volvo—basically,
buying equity investment in Volvo. It is not a huge amount so
far.
Professor Nolan:
Just to start at the end, which is China's $2.6 trillion foreign
exchange reserves, the total assets under management by global
asset management companies—principally, but not exclusively
banks—is $63 trillion. It can move at the drop of
a hat anywhere in the world. China's foreign exchange reserves
cannot. They have to be managed very carefully. Global banks,
and entities such as Blackstone, can just move their money at
the drop of a hat. They are far more damaging to global stability
than China's foreign exchange reserves. That is just to pick
up on the final point.
When we come to China's position in the world, China's
companies are nowhere in building global systems. Shell has over
$200 billion of global assets. BP has about $200 billion.
Vodafone has $200 billion. Those are just companies. Excluding
Hong Kong, which is a very special case—or even including
that—China has $56 billion of foreign direct investment,
which is very small. The United States has $4.3 trillion. We
have $1.7 trillion. In other words, even in our little country,
with 60 million people compared with 1.3 billion, we have more
than 10 times China's total stock of FDI. China is nowhere, as
Kerry correctly says. China's foreign direct investment in highincome
countries totals $27 billion. That is a couple of transactions—or
one transaction from a single multinational. They are nowhere.
If you look at their FDI in America, it is $3 trillion. In Europe,
it is $9 trillion. In the UK, as Kerry says, it is $1 billion.
The central question for us is, what do we want?
How do we understand them? What is our relationship, especially
with the giant 70 or 80 potentially globally competitive enterprises?
Do we welcome them? Do we want them to buy, for example, our
startup hightech companies through venture capital?
We have a lot of those around Cambridge. Do we welcome that?
We have not made up our mind. Marconi told Huawei, "You
cannot come in," and so Ericsson bought it because it is
white and Finnish and good, and China is considered not to be.
We have to make up our mind.
Do we want Chinese companies to do share exchanges
with British companies? I have heard a private discussion between
a leading Chinese company and a leading UK business, saying, "Can
we please exchange shares? Can we buy 10% of you and you buy
10% of us?" The answer was no. I am not going even to disclose
who it was. Do we want it or do we not?
Do we want our businesses to co-operate with Chinese
businesses in other parts of the world? The main exports we have
to China are not actually principally through Boeing or Airbus.
They are principally what we dig out of the ground and out of
the sea around the world—Shell, BP, Rio Tinto, BHP Billiton,
AngloAmerican. We dig it up and then sell it to China.
That is our main export to China.
Q319 Chair: Can
I just stop you there? I am intrigued with the thrust of what
you are saying. Are you implying that there is some sort of national
aversion to this? Companies quite happily swap shares with Russian
companies, shall we say, but not with China? Are you saying it
is a cultural attitude amongst British business?
Professor Nolan:
It is not British business; it is a wider context of apprehension
on the part of the Chinese Government, with good reason. A Chinese
firm attempted to buy Unocal. There was a storm of political
animosity. Huawei attempted to buy 3Com, or partially buy 3Com.
There was a storm of political hostility. Huawei very quietly,
but in the semipublic gaze, tried to buy Marconi. "No,
you cannot do it." We have to make up our minds. Do we
encourage it? I had a conversation with someone in this building—
Q320 Chair: You
said: "No, they cannot do it." Who blocked them?
Professor Nolan: You
would have to ask who blocked Marconi. In America we know it
was the relevant Committee. China does not want to be whacked
across the face. These are stateowned enterprises. It
is very humiliating. I had a discussion in this building with
a senior technologist who said, "We have to think carefully
about this. Let us suppose, for example, that in Nottingham University,
Imperial College, Oxford and Cambridge, Chinese companies were
to say, 'We are trying to solve the future problems of the world—transport
systems, building technologies, energy efficiency, all these issues.
Our 70 or 80 stateowned companies will be working together
like a giant version of Siemens or GE.' Let us say they said:
'We would like to partner your researchers. We would like to
build research facilities in Nottingham, in Imperial, in Oxford,
in Cambridge, share the IP and inject it into our giant companies
to solve our future and our common problems.'" We have not
made up our minds on that. It would be great for my University,
but is this something we want? We had better make up our minds.
I welcome it. I think we are different from Germany,
France or America politically and in terms of the structure of
our business. We cannot reinvent the wheel. We have no choice.
We are a mercantile culture. We are very successful at it, and
we must be open. That is my personal view. We have a great opportunity
to connect with China, but we cannot have one foot in—you
know, the hokeycokey. We have to make up our minds: are
we in or out?
Q321 Chair: I
think we have got the message. We need to move on, but is there
any further question you want to ask, Rebecca? Stephen?
Stephen Phillips:
From a practical business point of view, we need to recognise
that Chinese companies, when they are looking at the UK, have
exactly the same fears that British companies have when they are
looking at China. Addressing those issues is key. Because the
Government is so important in business in China, the UK Government's
role in attracting Chinese investment to the UK is absolutely
and utterly critical and vital. The demise of the RDAs does leave,
in the business community, a question mark as to how this is going
to be fulfilled until the new structures are put in place. There
is a concern in the marketplace at the moment.
Chair: Can I thank you
very much for your contribution? There is plenty of food for
thought there. If we have not asked a question that you think
we ought to know the answer to, feel free to write in and tell
us. Similarly, if, in retrospect, we think of anything that we
did not ask you but should have, we will contact you. Thank you
very much.
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